Bank Of England's Carney To Bolster Rates Pledge In Maiden Speech

Mark Carney will use his first speech as Bank of England governor on Wednesday to take on his doubters who question how long he can keep interest rates at record low levels.

* Carney to make first speech as BoE governor at 1245 GMT

* Governor expected to reinforce case for guidance plan

* Sterling, UK government debt yields fall ahead of speech

Mark Carney will use his first speech as Bank of England governor on Wednesday to take on his doubters who question how long he can keep interest rates at record low levels.

Carney failed to win over financial markets when the central bank announced on Aug. 7 that it would not raise rates at least until unemployment fell to 7 percent, something it forecast won't happen before late 2016.

Rather than fall into line with the BoE's guidance, investors are betting that monetary policy will begin to tighten a year earlier than that or even sooner.

Simon Peck, a fixed-income strategist at the Royal Bank of Scotland, said Carney might soften some of that market scepticism with his speech but was unlikely to make a lasting impact.

"When it comes to the market, there's only so far rhetoric can go," he said. "Just saying 'we are not going to hike rates' in amongst the stronger data doesn't really do it on its own."

Much of the recent sharp rise in government bond yields is attributed to signs that Britain's economy is quickly picking up speed after stagnating for much of the time since the 2007-08 financial crisis.

That, along with a cooling of the crisis in the euro zone and the possibility that the U.S. Federal Reserve could start weaning the U.S. economy off its bond-buying stimulus in September, are welcome changes for policymakers who have spent years trying to undo the damage of the global banking crisis.

But the change in outlook adds to the challenge for central banks, including the Fed and the European Central Bank, which want to make the most of their record low interest rates by pledging not to raise them any time soon.

Carney made such forward guidance a hallmark of his time running the Bank of Canada. But he faces the challenge of convincing British investors, businesses and households that the BoE can keep its foot on the stimulus pedal for another three years without pushing up the country's already high inflation.

That challenge was made all the greater after differences of opinion emerged among the bank's top policymakers.

Martin Weale voted against the forward guidance plan earlier this month and since then he has voiced concern that it risks fuelling inflation.

BoE Deputy Governor Charlie Bean was quoted as saying on Monday that the plan sent a clear signal that interest rates were "not likely to rise imminently" and he acknowledged the different views on when inflation might pick up.

MEETING THE MANUFACTURERS

Economists expect Carney to use Wednesday's speech - which starts at 1245 GMT and is followed by a news conference - to try to reinforce his low-rates plan by stressing just how far Britain's economy has to go before it returns to normality.

He may seek to spell out in more detail why the BoE believes inflation won't pick up even as growth returns - mainly because the central bank assumes companies can squeeze a lot more from under-utilised workers before they have to pay them more.

By making the speech in Nottingham, in the manufacturing heartland of England's Midlands and far from London's financial hub, Carney will probably stress his point that guidance on low interest rates is most effective with businesses and consumers who may be encouraged to spend more and help growth.

Sterling weakened and British government bond yields fell on Tuesday on expectations that Carney will take a strong stance in favour of maintaining stimulus.

Michael Saunders, an economist at Citi, said Carney might show investors whether he would favour reviving the BoE's bond-buying programme if markets push bond yields too high and threaten to smother the recovery.

"A phrase that Carney has often used is that guidance is most effective when a central bank puts its money where its mouth is," Saunders said. "So are they willing to?"